Chinese cities are taking steps to strengthen demand for local-government bonds, without explicit consent from national policy makers, as they look for new ways to cut the cost of servicing debt.
The latest measures relate to the collateral that municipalities require when they deposit cash at commercial banks. Typically, only central government bonds qualify. Now, authorities in at least five cities also are accepting local-government bonds as collateral, according to people familiar with the matter, who asked that they and the cities not be identified out of concern they may be punished.
At stake for China’s local authorities is the success of a swap program where they aim to transfer hundreds of billions of yuan in bank loans acquired through off-balance-sheet vehicles into lower-cost bonds. Efforts by the central bank to bolster liquidity haven’t proved sufficient yet to secure demand for new local-government bonds at interest rates authorities are willing to pay. Jiangsu province delayed a bond sale in April.
“The game is still going on: the governments want to pay lower interest and the banks want to see higher yields,” said Ding Shuang, head of greater China economic research at Standard Chartered Plc in Hong Kong. “We will see more push forward and back over the issue in the coming months.”
The steps taken by local governments may make their bonds slightly more attractive for banks, but not much, according to Ding. He said authorities will have to raise yields eventually to make the securities more appealing.
The Ministry of Finance didn’t immediately respond to a faxed request for comment on the move by cities. Municipal bonds from Shanghai and Zhejiang rose to the highest since August 2012 today.
Cities issued the new rules in April without getting explicit approval from the central government. The treasuries of local governments hold about 1.6 trillion yuan ($258 billion) in cash, according to an estimate published in a note by Huachuang Securities Co. last month.
They made the move as China’s central bank considers expanding its own lending tools to boost demand for local-government bonds.
Local Chinese authorities have previously skirted central government regulations to get things done, or made changes on their own. Reforms to rural land rules in the late 1970s and, in recent years, the practice of off-balance-sheet borrowing were initiated at local levels before being recognized by the central government.
Premier Li Keqiang’s government is trying to develop a transparent municipal bond market to increase transparency and reduce leverage in the economy. Policy makers earlier this year announced a program that will convert as much as 1 trillion yuan of off-balance-sheet debt into municipal notes this year. Finance Minister Lou Jiwei has said the swap may be expanded.
Provincial authorities estimated they had 16 trillion yuan in liabilities in a review earlier this year, the China News Service said April 25. That was a 47 percent jump from June 2013.
— With assistance by Steven Yang